Reducing Japanese business tax

In the previous section introducing Japanese business tax structuring, we noted that many foreign companies doing business in Japan are not properly structured to reduce their Japanese corporate taxes. This might be because there is not a lot of clear and unambiguous tax advice available about business in Japan and Japanese business income tax; my personal experience supports that possibility. While managing a US software vendor’s Japanese subsidiary, I asked several partners of the Tokyo office of our Big-5 corporate auditor the following question: “We are losing a fortune in Japanese taxes; can someone here please tell me how we can better structure our US – Japan operations to get more cash back to the head-office?” In 6 years managing that company, and despite a constant stream of cash lost to Japanese income taxes, I did not receive a clear answer to that question and eventually figured it out for myself.

In the next sections, I will try to give you the benefit of that experience to answer the above question. I am neither a CPA nor a tax attorney, Venture Japan is neither a law firm nor a tax accounting firm, but these thoughts apparently have some merit because an auditor from the National Tax Agency (Japan’s IRS) once asked me “So, tell me, has any company taken your advice from the website?”

First though, a note of caution. You must carefully consider that all high-tax countries, Japan included, make subtle distinctions between what is illegal tax evasion and what is legitimate tax deferral and tax reduction. Directors of Japanese companies are joint and severally (meaning that all directors are liable for any one director’s failure) legally responsible for corporate misdemeanors and are much less protected by the corporate veil than their counterparts in the US and Europe. Japanese laws governing companies, commerce, and taxation, contain penal provisions and if the National Tax Agency suspects that a director is complicit in tax avoidance, can hold him or her in detention for extended periods before filing charges. In Japan, most trials are magistrate trials, where the judge (or a panel of 3 judges) hears evidence and passes judgement. Japanese courts have a very high conviction rate and of all cases heard each year, only acquit a few defendants. Case-law (when judges use decisions made by judges in similar previous cases as precedent) applies in Japan, but while in the US courts case-law often creates conflicting precedents that blur the original intent of a statute, the decisions of Japanese judges tend to reinforce and harden statutes. So be warned: when doing business in Japan, you must thoroughly research the Japanese laws relating both to your industry and to the establishment, management and taxation of your Japanese business. If not properly implemented, tax reduction and tax deferral can verge on tax evasion and put you in prison. Before embarking on any tax structuring strategy, you must take legal advice from a Japanese attorney to make sure that your tax reduction strategy is not considered tax evasion.

So how can you legitimately cut your Japanese business tax?”

First, we need to consider the factors that decide how you tax-efficiently structure your business in Japan. The 3 key factors will be: